China and the Developmental State Model

Katelyn DeNap

Although “pioneered by Japan,” professor of international economics and politics Dr. Mark Beeson observed the economically interventionist model of the developmental state was adopted by several other states in Asia, including India, Indonesia, Japan, Malaysia, the Philippines, South Korea, Taiwan, Thailand, and Vietnam.

Is China a developmental state? China’s economic success—it is the world’s second-largest economy—did not simply happen. The state played a critical role in this rapid expansion, but many question the level to which this intervention was institutionalized. Others have questioned whether China’s economic expansion earns it a spot among states that developed earlier, and in far different global economic and political environments.

As University of Oxford economics Professor John Knight explains, deciding China’s status as a developmental state has been difficult because scholars can’t agree on a definition of the developmental state.

China enjoys stability under the Chinese Communist Party, which functions relatively independent of the public. Political leadership in China focuses on the economy and carries out extensive investment in education, healthcare, and infrastructure. But the question remains whether the state has established adequate institutions and policy to guide its economic development programs.

While China has long lacked policy and state-led institutions tasked with coordinating public-private partnerships (PPP), it has recently begun to establish a framework to support its developmental policies and goals. Ultimately, the formal foundation that is emerging will support expansion of PPP within China while also confirming the country’s status as a developmental state.

Defining the developmental state

The concept of the developmental state was first introduced by Chalmers Johnson in 1982. Johnson identified four intrinsic characteristics of a developmental state:

• A state must be led by elites capable of constructing and implementing economic policy without giving into the demands of the public, which could undermine development.
• Investment in educational opportunities for all people is necessary. Johnson explained investment and policy should foster “the equitable distribution of wealth created by high-speed growth.”
• The government must recognize the value and necessity of interventionist economic policies that respect, rather than interfere, with the economy’s price mechanism.
• There must be coordination of PPP by a state-led institution.

While Johnson felt any developmental state would have these four qualities, he recognized each state would develop uniquely; and thus, the “degree to which each government meets these various characteristics [will vary] overtime.” Political scientists agree China embodies these characteristics, but question the state’s level of institutional commitment to PPP.

The developmental state and China

“The China model includes an authoritarian regime to guide economic development, limit access to the policymaking process, and prevent the formation of interest groups, such as labor unions, which would distract from the priority on economic growth, ” said Dr. Bruce Dickson, professor of Chinese politics at the George Washington University.

The existence of autonomous politicians in China allows the government to engage in expansive economic planning. For example, China heavily invested in education to promote the development of a skilled workforce; between 2000 and 2010, Dickson points out, university enrollment increased fourfold, from more than five million to just over 22 million students.

China’s approach to economic planning seems in line with the developmental state model, but the role of PPP in China must also be considered. China has long been wary of promoting the private sector, and has been slow to provide an official framework for PPP. Yet, as China has continued to develop, it has begun to recognize the potential value of PPP.

Importance and value of PPP

Economic growth spurs demands for development across other sectors of society. To ensure basic demands are met, a state must be able to fuel the development of public goods such as transportation, healthcare, and education. Funding the development of public goods is incredibly costly and time consuming. Often, developing states lack the expertise and funds to take on such projects themselves; this is where PPP comes into play.

PPP reduces the financial burden on the state and taxpayers for funding public goods and puts part of the financial responsibility in the hands of private companies. In this arrangement, the state and the private actors share the cost of the project. While private expertise is used, the state is still able to oversee the implementation of economic policy and guide development.

PPP also ensures shared risk. Often, states shy away from major public goods projects because of the risks of such massive undertakings. Projects may end up requiring more time or money than estimated. The costs may be higher than the returns. Political factors may prevent efficiency in the delivery of goods.

“PPP is a way of protecting existing and future taxpayers, reducing the overall tax burden, spreading risk, reducing ‘bureaucracy’ and increasing the effectiveness of delivery of many public sector ‘responsibilities’,” according to professors of business John Adams and Alistair Young, and professor of finance Wu Zhihong.

PPP in China

The study of PPP in China begins with state-owned enterprises (SOEs). Throughout China’s early development, as discussed by Dickson, SOEs received a majority of government support while the private sector was largely ignored. Some believe this preferential treatment of SOEs continues to prevent PPP in China, but the state has recently been creating space for the private sector. Beeson points out, SOEs and private firms are now being drawn toward cooperation within a newly established policy and institutional framework for PPP. But how will PPP fit into this framework?

Rather than sharing responsibility, the state and private businesses assign themselves particular tasks and bear only the responsibility for those aspects of the project, according to professors of economics and development Cheng Zhe, Ke Yongjian, Amy Jing Lin, Yang Zhenshan, and Cai Jianming. This strictly ordered approach to PPP has been conducive to China’s infrastructure development. Focused heavily on the provision of public services, infrastructure projects have included the construction and development of roads, water treatment plants, and power plants. Using PPP to create public infrastructure has reduced the financial demand on the government while promoting increased public access to vital services.

While PPP may have been slow to gain government favor, the 2008 Olympic Games in Beijing elevated PPP to a new status. China was experiencing an “infrastructure shortage” following its meteoric economic growth when it was announced it would host the 2008 Olympics, according to engineering and infrastructure specialists Dr. Tillman Sachs, Dr. Robert Tiong, and Dr. Wang Shouqing. Unable to handle the necessary building and infrastructure projects alone, the government opened channels for PPP. With investments from foreign and domestic private firms, China was able to foster rapid development; but in allowing for an increased role of the private sector, China was forced to create a framework to govern it.

Early PPP policy was issued by local-level government and lower-level ministries within the central government. But while there was limited policy in place, 10 years after the introduction of the Regulation on Developing Urban Infrastructure with PPP, there remained no formal institution coordinating, governing, or monitoring PPP within China. This began to change in 2014.

In the past few years, the Ministry of Finance and the National Development and Reform Commission have become the leading agencies in PPP management. The Ministry of Finance recently established a PPP Center that has created an expansive network of resources to aid government officials in developing policy, provide the public and private sectors a platform for coordination, and offer specific advice and training for PPP projects, according to the World Bank. The emerging framework for PPP in China is promising for the private sector, which now has a seat at the table in terms of domestic development.

While PPP is on the rise, it appears that infrastructure development continues to be the central priority. With a growing population and increasing demands for a better quality of life with access to necessary public goods, the increase in PPP is to be expected. According to the World Bank, as of 2015 “the total number of PPP projects reaching financial closure since 1990 in China has climbed to 1,223.” As China’s economic growth has begun to slow, the government will likely turn to PPP increasingly over the coming years to provide public services. SOEs will retain a central role within China’s developing PPP platform. Their prominence is indicative of the state’s desire to maintain a buffer between itself and private-sector influence, but it does not discount China’s recent institutionalization of PPP.

China: The late bloomer

While scholars have often considered China’s economic planning to be restrictive, the perception of the private sector as helplessly constrained and ineffectual is no longer a fair analysis when one considers the growing scale of PPP.

The impressive levels of coordinated PPP in China have earned the state a position within the world’s top five countries with regard to investment in PPP involving infrastructure, according to the World Bank. Yet, PPP has many obstacles to overcome in China. Considering corruption and China’s ongoing regulatory changes, scholars argue PPP will likely require a more certain political environment before it becomes firmly entrenched in China’s development scheme. Nonetheless, PPP will be a necessity as China continues to develop.

Keeping in mind the sheer size of the country and its population, improvements to infrastructure, while not as daunting as the initial development of infrastructure, will be needed on a massive scale. A great deal of investment will be required, all of which the government will be unable to provide as it turns its attention to healthcare and education. PPP will be the answer as it offers efficiency and lifts part of the financial burden from the government.

As of 2015, 1,182 PPP projects were in the process of construction, according to the World Bank. But many believe the number of active projects is much higher because the World Bank does not account for the involvement of SOEs. Despite the number of projects, PPP has yielded incredible success in China. The investment in PPP designated for infrastructure development has resulted in “access to electricity [reaching] 100%, 95.5% of the population now [having] access to improved water sources, and 76.5% of the population [having] access to improved sanitation facilities,” according to World Bank indicators.

There are hopes that China’s population will continue to experience an increase in quality of life as access to public services continues to expand and improve. As authors Cheng, Ke, Lin, Yang, and Cai show in the graph below charting China’s fiscal revenue and the number of PPP projects over a period of 20 years, China’s continued economic growth will support a rise in PPP projects.

Fiscal Revenue vs. PPP Projects in China (1994-2013)

While some are concerned with the recent slow in China’s economic growth, its growth continues to exceed rates of a majority of states around the world. Growth, whether fast-paced or slow, is what matters in China’s developmental scheme. Developmental states do not appear overnight; and China may take years to grow into the model Johnson originally proposed. Ultimately, China’s late arrival to the developmental scene does not discount its qualification as a developmental state.

About the Author:   Katelyn DeNap is currently pursuing a Master’s degree in Asian Studies at the George Washington University Elliott School of International Affairs. At the university, she serves as the Vice President of the Organization of Asian Studies. She works for the US-China Business Council as an intern in the Communications and Publications Department.